wall street

Wall Street’s Fatal Flaw: Confusing “Disruptors” With “Corruptors” – Pam Martens

In the late 1990s, Salomon Smith Barney’s telecom analyst, Jack Grubman, was viewed by his powerful firm as a “disruptor.” He was throwing out the old rules on how a telecom analyst should interact with a company on which he was delivering research to the public and creating a new, innovative model. Instead of following the old rules and remaining pristinely independent and objective, Grubman was sitting in on board meetings at WorldCom, giving investment advice to its executives, while simultaneously issuing laudatory research to induce the investing public to buy the stock.

When BusinessWeek questioned Grubman on this new analyst model on May 14, 2000, here’s how the disruptor explained his redesign of his job:

“What used to be a conflict is now a synergy…Someone like me who is banking-intensive would have been looked at disdainfully by the buy side 15 years ago. Now they know that I’m in the flow of what’s going on. That helps me help them think about the industry…Objective? The other word for it is uninformed.”

Grubman was seen by himself and his firm as a disruptor not because his model made any sense, but because it was bringing in hundreds of millions of dollars in deals for Salomon Smith Barney. Grubman, in turn, got his piece of the action. According to the SEC, between 1999 and 2002, Grubman’s compensation exceeded $67.5 million. Grubman was, in fact, a corruptor not a disruptor. Many of the companies he recommended went bust. The SEC barred him from the industry for life and fined him $15 million for issuing fraudulent research.

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